Unemployment Rises to 9.7%

Further job losses in August were no surprise to economists, but manufacturing was hit harder than expected

On the eve of the Labor Day weekend, the government announced on Sept. 4 that the U.S. economy lost 216,000 jobs in August and the number of people who have been out of work for half a year or more edged up to nearly 5 million. The number was in line with economists' dismal expectations, but some were surprised by the big losses on the production side of the economy: Even though overall job losses were down from a revised 276,000, losses in manufacturing accelerated to 63,000 from 43,000.

The unemployment rate rose to 9.7% in August, the highest since June 1983, from 9.4% in July as some people reentered the labor force in search of work. "It is disappointing that the recovery in activity has not generated a greater improvement in labor market conditions," Paul Dales, U.S. economist for Capital Economics in Toronto, told clients in a research note.

Pay growth remained weak, too. Average hourly earnings rose just 0.3% from July and 2.6% from a year earlier. There's a positive side to weak pay growth—the flexibility of pay allows companies to keep more workers on the payroll. But it does make it hard for workers to increase their spending. "As an economist I'm all in favor of a flexible workforce. But it's pretty tough for a lot of workers," John Silvia, Wells Fargo's (WFC) chief economist, said in an interview.

A Case for Continuing Stimulus Efforts

Economists had projected employment losses of 230,000 and an unemployment rate of 9.5% in August, according to a Bloomberg survey. Many economists believe the jobless rate could reach 10% in coming months despite signs of healing elsewhere in the economy.

Continued deterioration in the jobs market means that the Obama Administration can't yet afford to back off its efforts to stimulate growth, and the Federal Reserve will have to continue with its policy of near-zero short-term interest rates for the time being, economists said. Treasury Secretary Timothy Geithner told reporters in Washington this week that efforts to battle the recession must continue, saying, "We've come a very long way, but I think we have to be realistic, we've got a long way to go still."

Pointing to the rise in long-term unemployment, the National Employment Law Project issued a statement urging Congress to further extend unemployment benefits, which have already been extended under the federal stimulus program. "The alternative is that hundreds of thousands of workers will be left out in the cold," the organization said.